1. Both growth and efficiency required
Reimbursement will continue to decline from the government and commercial payors.On the government side, the impact of Congress' fiscal cliff negotiations is negative for hospitals and health systems. Congress negotiated again to avert a scheduled 26.5 percent cut in Medicare payments to physicians but puts the pressure on hospitals to make up more than half of the lost projected government savings (an estimated $25.1 billion dollars). More cuts can be expected in the upcoming budget negotiations, including a 2 percent across-the-board cut from Medicare if the sequester cuts take place during the negotiations.
While the federal government did not overrule an Anthem Blue Cross of California premium rate increase of 22 percent, it appears insurers are using physicians groups and IPAs to pull reimbursement out of hospitals in many more markets. Through these narrowed networks, commercial insurers predict the proposed cost reductions range anywhere from 1 percent to 20 percent lower than traditional plans.1
As a result, many health system leaders have been left scrambling for influence over primary care, growth wherever they can find it and sizable reductions in costs to live in a much constrained reimbursement future.
2. Health Systems must go beyond traditional delivery models to remain relevant
Rapidly growing new healthcare delivery channels are challenging the position of the traditional channels of care delivery and with them, the owners of those channels. Thus while health systems are building larger and larger employed primary care physician groups to build a referral base and manage populations' health, the growth of new channels such as urgent care, retail and virtual/online care are siphoning off the most profitable and healthiest patients.Consider this, urgent care clinics have grown 30 percent in the last five years, now total $14 billion in revenue, whereas retail based clinics have grown almost 60 percent in the same time period. The virtual medium continues to experience growth with younger and more likely insured populations (the population age 25-29 is nearly seven times more likely to use on-demand primary care mediums than those age 65+).
Health systems that have embraced these new channels can go directly to employers, manage a larger population and sell what people increasingly want to buy. Those that haven't are seeing these rapidly growing channels filled by insurers, retailers and other for-profit investors threatening the relevance of the health system for what will amount to nearly 25 percent of the primary care access in the next several years.
3. A New set of capabilities must be created to compete in the changing environment
Living under a value-based environment requires a whole new set of capabilities to do more with less. Moreover, population health/risk-sharing reimbursement models require mindset shifts from patient to population. Those without the intellectual capital and capabilities or the resources to develop it are being driven out of the market and into larger and larger systems. While these systems offer the protection of a large group, provide the experience and capabilities needed in the future, they do so with high overhead costs and reduced control at the local market levels.Merger and acquisition activity continues to show the inability of organizations that do not have the needed future capabilities to make it without a partner. 2012 saw another $1.89 billion in hospital merger and acquisition activity.2 Yet a report from Booz and Company (2012) indicated that all mergers don't guarantee strong financial returns or success. That same study showed nearly 60 percent of all mergers resulted in acquired hospitals performing worse than their peers.3
Hospitals and health systems need to make deliberate investments to position themselves better in today's fee-for-service environment, while preparing for the future value-reimbursement environment. Survival today depends increasingly on both growth and operational efficiency, while future success depends on building new capabilities to remain relevant in the population health dominated environment. Living in both environments is challenging. Organizational leaders must be able to build their current model while also being willing to pursue efforts that make their current capabilities obsolete as they reshape their organizations to thrive in the future. Being able to balance these competing strategies is what will set apart the great healthcare strategists.
Footnotes:
1 Burns, J. “Narrow Networks Found To Yield Substantial Savings.” Managed Care. February 2012. ©MediMedia USA
2 Irving Levin Associates, January 2013
3 http://www.healthcarefinancenews.com/news/most-hospital-m-transactions-are-financially-unsuccessful-study-says
Kate Lovrien and Luke C. Peterson are principals at Health System Advisors. Together they have more than spent more than 25 years advising senior healthcare leaders on their market and organizational strategy. They can be contacted at Kate.Lovrien@HealthSystemAdvisors.com or Luke.Peterson@HealthSystemAdvisors.com. Health System Advisors is a strategy consultancy focused on advising leaders, advancing organizations and transforming the healthcare industry.